Inventory dynamics and endogenous persistence in a new Keynesian model

ABSTRACT

We show that a New Keynesian model incorporating inventory dynamics can generate a hump-shaped response of macro-variables to shocks even without habit formation. The impulse responses from the calibrated model show that, in the absence of habit formation, the macro-variables, including output and consumption gaps and the real wage, display a gradual hump-shaped response to monetary policy shocks. We calibrate seven other variants of the model without habit formation. We find that the results still hold in a flexible price model, while the presence of inventories drives the persistence of the macro-variables. Besides, the model replicates most of the empirical business cycle regularities of inventories and the inventory–sales ratio in the data.

KEYWORDS:

• Inventory dynamics
• habit formation
• hump-shaped response
• monetary policy shocks

JEL CLASSIFICATION:

• E30
• E32

Disclosure statement

No potential conflict of interest was reported by the author(s).